PROTSMAN ET AL. v. JEFFERSON-CRAIG CONSOLIDATED SCHOOL CORPORATION OF SWITZERLAND COUNTY ET AL.
No. 28,933
Supreme Court of Indiana
Filed January 9, 1953.
231 Ind. 527
EMMERT, C. J.—I concur in the result of the majority opinion. It seems to me it is not necessary to decide more than that the appellee failed to prove damage now or in the future to any property right it might have. There was no proof that appellant was injuring or would injure the appellee by depriving it of any of its motor freight business. The general rule is, injunctions are only issued to protect civil property rights. State ex rel. Zeller v. Montgomery Circuit Court (1945), 223 Ind. 476, 62 N. E. 2d 149.
The record here discloses this to be another case where a temporary injunction was issued without any finding whatever to support it. In my opinion this was error for the reasons stated in the dissenting opinion in State ex rel. Pub. Serv. Comm. v. Marion C. Ct. (1952), 230 Ind. 277, 302, 103 N. E. 2d 214.
NOTE.—Reported in 108 N. E. 2d 884.
PROTSMAN ET AL. v. JEFFERSON-CRAIG CONSOLIDATED SCHOOL CORPORATION OF SWITZERLAND COUNTY ET AL.
[No. 28,933. Filed January 9, 1953.]
Robert D. McCord, Harry T. Ice, David N. Brewer, Robert D. Risch, of Indianapolis, (Ross, McCord, Ice & Miller, of Indianapolis, of counsel), amicus curiae.
Cooper, Cooper & Cooper, of Madison, and Gretchen H. Cole and Chester R. Callis, both Vevay, for appellees.
DRAPER, J.—This is an appeal from a judgment in favor of the defendants, who are the appellees in this appeal, in a suit brought by the plaintiffs, the appellants here, as taxpayers, to set aside a lease entered into between the defendant Jefferson-Craig Consolidated School Corporation, of Switzerland County, Indiana, as lessee, and the defendant Jefferson-Craig School Building Corporation, as lessor, under the authority of
The facts were stipulated. Except as they may be amplified as we proceed, they are condensed as follows:
The building corporation was formed under the laws of the State of Indiana for the purpose of acquiring land, erecting thereon a school building, and leasing the same to the school corporation. On April 9, 1951, the corporations entered into a lease contract whereby the property is leased to the school corporation for a period of thirty years beginning at the time the building is ready for occupancy.
The lease requires the school corporation to provide all repairs, replacements and maintenance and to provide insurance against loss by fire, tornado and other casualties and to provide rent or rental value insurance for the benefit of the building corporation or such parties as the latter may designate. The annual rental is $16,000.00, payable $8,000.00 on June 30 and December 30 of each year. The school corporation may renew the lease for a further, like or lesser term, upon the same or like conditions.
The lease grants the school corporation an option to purchase the property on any rental payment date at a price equal to the amount required to enable the building corporation to liquidate by payment of all indebtedness, with accrued and unpaid interest, and to redeem and retire any stock at par value plus accumulated dividends, the expenses and charges of liquidation, and the cost of transferring the property.
The lease further provides that “Nothing herein contained shall be construed to provide that Lessee shall be under any obligation to purchase the demised premises, or under any obligation in respect to any creditors, shareholders or other security holders of Lessor.”
The land and building will cost $280,000.00. The proposed building is of such construction that its useful life will exceed forty years. The value of the taxable property within the school corporation as ascertained by the last assessment for state and county taxes is $1,815,366.00.
The appellants are taxpayers of the school corporation, and the building corporation is threatening and, unless enjoined from so doing, will proceed with the sale of securities and the purchase of said land and erection of said school building, and the school corporation will, unless enjoined, go into occupancy of said property under and pursuant to the provisions of said lease.
The school corporation perfected this appeal after its motion for new trial, which asserts that the decision is contrary to law, was overruled.
The right of the school corporation to rent a school house is not questioned. The problem presented is whether the lease contract is void because it creates a present indebtedness of the school corporation in the sum of $280,000.00 at a time when the limit of indebtedness the school corporation may constitutionally incur
It was held in The City of Valparaiso et al. v. Gardner (1884), 97 Ind. 1, that a municipal corporation may lawfully contract for necessary services over a period of years and agree to pay therefor in periodic installments as the services are furnished. In such cases the aggregate of the amounts to be paid as the services are rendered under such contracts are not considered as an indebtedness of such corporation, and such contracts are not rendered invalid by the fact that the aggregate of the installments exceeds the debt limitation. That decision has been followed by later cases in this jurisdiction,3 and the rule prevails in a majority of the other jurisdictions. Anno. 103 A. L. R. 1160.
The question as it involves leases is not new. Similar problems have been before this court on at least three
In that case it was noted that the rental was a fair one. In the course of the opinion this court said:
“It is settled in this State that if a city contracts for water, light or other things which pertain to its ordinary and necessary expenses, and agrees to pay for the same annually or monthly as furnished, such contract does not create an indebtedness for the aggregate sum of all the annual or monthly payments, because the debt for each year or month does not come into existence until it is earned. But if the indebtedness of the city already equals or exceeds the constitutional limit, and the current revenues are not sufficient to pay such indebtedness when it comes into existence, including other expenses for which the city is liable, an indebtedness is thereby created and the Constitution is violated.”
In Hively v. School City of Nappanee (1930), 202 Ind. 28, 169 N. E. 51, 171 N. E. 381, 71 A. L. R. 1311, a lease contract was made between the school city and
Citing for its authority City of South Bend v. Reynolds, supra, this court there said:
“. . . where an ordinary lease is entered into, at a reasonable rental, for a term of more than one year, a present indebtedness is not created in the aggregate sum of all the annual payments of rent to become due under the lease, and such a lease contract, even though it includes an option to purchase the property, does not violate Art. 13 of the Constitution, if the annual rental installments, as they become due, do not bring the indebtedness to a point beyond the constitutional limit.”
But it was alleged in that case that the rentals provided for in the lease were in excess of a fair and reasonable rental, and said payments so reserved were,
The court below sustained a demurrer to the complaint. In holding the demurrer should have been overruled, this court observed that in that case (unlike this one) the failure of the school corporation to pay the indebtedness would result in the loss to the school corporation of its own property, and indicated that in the court’s opinion the allegations of the complaint, taken together with the terms of the lease contract, disclosed an arrangement for the purchase of property which was pledged for the payment of an indebtedness, and that the contract was entered into for the purpose of accomplishing an evasion of the Constitution by indirection.
Jefferson School Twp. v. Jefferson Twp. S. Bldg. Co. (1937), 212 Ind. 542, 10 N. E. 2d 608, is the last case on the subject. There the building company was also organized pursuant to
It was there held that the only relationship existing between the contracting parties was that of lessor and lessee, and the transaction did not impose upon the lessee a present indebtedness in excess of its constitutional debt capacity. The court observed that compliance by the lessee with the terms of the lease would enable the school corporation eventually to become the owner of the school building, but said that this did not change the nature of the obligation incurred under the lease contract insofar as the nature of the obligation related to the question of the amount of the indebtedness, and further said:
“The fact that the building company was willing to give the school building to the Jefferson School Township when the building company had been paid an amount equal to its investment and a reasonable return thereon does not change the lease-contract into a contract to purchase. It is true that the Jefferson School Township, through the device of a long term lease providing for annual rental payments, may become the owner of a school building which, in view of Article 13 of the State Constitution, it could not have acquired in 1928 by issuing bonds. But it does not follow that either the arrangement or the result constitutes an evasion of the limitations of Article 13 of the State Constitution. The lease-contract is not in contra-
vention of Article 13 unless it necessarily created a legally enforceable debt obligation for an amount in excess of the amount permitted by Article 13.”
Hively v. School City of Nappanee, supra, was distinguished in the Jefferson School Township case. It was not overruled. It was pointed out that by the demurrer filed in the Hively case it was admitted that the annual rentals provided for in the lease were in excess of a fair and reasonable rental; the payments so reserved were in truth and in fact payments of the part of the purchase price for said school building; the lease was entered into for the purpose of evading the Constitution and thereby causing the school city to become indebted in an amount in excess of its constitutional limit; and by the execution of the lease the city would become indebted to the building company in the total sum of $180,300, which exceeded the two percent limit of indebtedness.
We are unable to distinguish the Jefferson Township case from the case at bar. The appellants make no effort to do so. They rely on the Hively case, and seek to dispose of the Jefferson Township case by saying it is subject to criticism in that the court should not have taken as true allegations of conclusions in the complaint in the Hively case which were in conflict with the provisions of the lease in that case, which lease was attached to the complaint as an exhibit.
We think we need not discuss the validity of the criticism. Rightly or wrongly the court did assume in the Hively case that the above mentioned allegations of the complaint must be taken as true. So far as the case before us is concerned, the important consideration is that the Hively case was decided on the basis of the facts so assumed to be true. On that basis the decision was clearly right, and it and the decision in
As noted in the Jefferson Township case, considerable emphasis was placed in the Hively case upon the allegations of the complaint in that case that the annual rental payments were in excess of a fair rental. Such is not the case here. The complaint here does allege that to be a fact, but there is no evidence whatever to support that allegation. It is stipulated that notice of the execution of the lease was given by publication and remonstrances were filed thereto, and thereafter the State Board of Tax Commissioners found that a necessity existed for the execution of said lease, and that the rental therein was fair and reasonable and said remonstrances were denied. Thus the only evidence before the court was to the effect that there was a necessity for the execution of the lease, and that the rental was fair and reasonable. If that be true, it follows as a matter of course that no part of such rental payments could be payments of purchase price in disguise. The case is apparently one where the lessor voluntarily relinquishes to the lessee the profits which usually flow from the ownership of leased real estate.
We are reminded that the building corporation is limited in its purposes to acquiring a site, erecting a suitable school building, leasing it to the school corporation and collecting the rentals and applying them as provided by statute; that the school corporation pays any taxes or assessments levied against the property, pays for insurance, and is responsible for maintenance, repairs, alterations and improvements; that the building corporation cannot make a profit; but in effect it merely collects money from the lessee with one hand
Actually we are required only to examine the transaction for the purpose of determining whether the school corporation becomes indebted by the lease-contract in excess of constitutional authority, but should it appear that such is in reality the case, it would be our duty to so find, regardless of any subterfuge or attempt at concealment no matter how plausible.4 But the particular question before us is not an open one in Indiana. On the authority of the Jefferson Township case we feel constrained to hold otherwise. It was said in that case that the fact the school corporation could, by paying a reasonable rental over a period of years, become the owner of the building, did not change the lease-contract into a contract to purchase a building, nor create a present indebtedness where none actually existed. We may add that, in our opinion, the limitation of the activities in which the parties may be required or permitted to engage during the life of the lease are equally impotent to effect such a change.
If the school corporation is unable to build a school house it must lease one. If, as it appears here without contradiction, the school corporation can lease a new
Much stress has been laid upon the fact that a tax must be levied each year to pay the lease rentals.
We have examined cases cited from other jurisdictions by the parties to sustain their respective positions. We think it would be fruitless to analyze them here for we consider the Jefferson Township case as controlling. We may say, however, that from our examination of those cases we believe that the following editorial statement found on page 1362 of 145 A. L. R. is supported by the authorities. It is as follows:
“The recent cases on the point tend to confirm the general principle stated in the original annotation, that the leasing of property by a city, county, or other political subdivision, with an option to purchase the same, does not give rise to an indebtedness or liability of the public body for the stipulated optional purchase price or for the aggregate of all the rentals for the entire term, provided the instrument is in fact a lease, and not a contract of purchase on the instalment plan.”
The judgment is affirmed.
Gilkison, J., dissents with opinion.
DISSENTING OPINION
GILKISON, J.—I am unable to agree with the majority opinion for the reasons hereinafter stated.
We are all agreed that the constitution of the state of Indiana forbids any political or municipal corporation of the state to “become indebted in any manner or for any purpose to an amount in the aggregate exceeding two per centum of the value of the taxable property within such corporation, to be ascertained by the last assessment for state and county taxes previous to the incurring of such indebtedness; and all bonds or obligations, in excess of such amount, given by such corporations, shall be void:”
The opinion correctly states that “the value of the taxable property within the school corporations as ascertained by the last assessment for state and county taxes is $1,815,366.00” and that the school building contemplated and the land upon which it is to be located will cost $280,000.00. Of course, this will constitute an indebtedness of 15.4+ per centum of the value of the taxable property within the two township corporations involved. The opinion correctly states that “the limit of indebtedness the school corporation may constitutionally incur is only $36,307.32.”
But it was asserted in argument that the state legislature by
“In appraising the validity of the statute before us and the proposal to proceed thereunder by appellees, we must consider the purpose of the debt limitation section of the Constitution and must look through the form of the statute to the substance of what it does and we should not countenance subterfuge to evade the intent of our fundamental law. Voss v. Waterloo Water Co. (1904), 163 Ind. 69, 89, 90, 71 N. E. 208. State ex rel. Matthews, Governor v. Forsythe (1896), 147 Ind. 466, 472, 473, 44 N. E. 593.” Cerajewski v. McVey (1947), 225 Ind. 67, 71, 72 N. E. 2d 650.
“It seems to us that the clear purpose of §1, Art. 13, of the Constitution, was to prevent the creation of an excessive debt by a real limitation upon the power of the legislature to authorize indebtedness. If it may be circumvented by the simple device of creating new and additional political or municipal corporations in the same territory, each with separate and independent borrowing power, for the purpose of evading the constitutional prohibition, no real limitation upon the power of the legislature to authorize indebtedness is provided and the object of the constitutional provision is defeated . . .”
In Rappaport v. Dept. of Public Health (1949), 227 Ind. 508, 517, 87 N. E. (2d) 77, we said:
“No hard and fast rules to test the question of evasion in cases of this kind can be laid down. Each case must stand on its own bottom. In each case, we must look to the true inwardness of the situation, in the light of the purpose of the constitutional provision. If, on the whole, the real effect seems to be to increase borrowing power in the exercise of substantially the same governmental function, in substantially the same area, rather than better to accomplish a public service, then there has been an evasion and Article 13 has been violated.”
“. . . Whether incurred in one name or another ultimately it (the debt incurred) would have to be paid by the same taxpayers of the same areas. . . . To shift a governmental function from an old governmental unit to a new one in the same area in effect would, to the extent of the indebtedness incurred by the new unit, in connection with the exercise of such function, enlarge the debt limit within which the exercise of the function had been financed. This has been done by the statute under consideration. With this in mind, and with the further fact in mind, that substantial control remains in the city, with only a little change in mechanics, we are almost compelled to think that
the change was made for the purpose of circumventing the constitutional debt limitation, and, even though made with the best of motives, it transgresses our fundamental law. If within our constitution, as it is, we cannot finance necessary hospital additions and improvements, then we should amend the constitution, not flout it.
“. . . The new setup may have been innocently conceived with the best motives in the world, but in testing the constitutionality of legislation, courts do not look to motives or the wisdom or desirability of the end sought to be attained. We may look only to the effect and result, and, if the new legislation; however desirable, appears to be a device which in fact serves to circumvent the constitutional debt limitation provision, we have no choice but to condemn it. . . . ‘but we can not escape the force of the strong and plain provisions of our organic law.’ ”
In Hively v. School City of Nappanee (1929), 202 Ind. 28, 169 N. E. 51, a case involving an older statute,
“The contract here, read as a whole, and considered together with the Acts 1927, Ch. 223 leaves no doubt in the mind of the court that it was entered into for the purpose of evading the mandate of the Constitution, and, of doing indirectly, through the plan and through the corporation provided for by the act, that which could not be done directly. The law will look to the substance of the transaction regardless of its form or color. State ex rel. v. Forsythe (1896), 147 Ind. 466, 473, 44 N. E. 593, 33 L. R. A. 221.”
The title of
“AN ACT concerning the acquisition of sites, construction, equipment and financing of buildings for school purposes by private corporations and the leasing and acquisition thereof by school corporations, and declaring an emergency.”
Section 1 of that Act, among other things, provides as follows:
”Provided, however, That no such contract of lease shall be entered into for a period of more than thirty years, nor unless . . . the board of school trustees, advisory board or the body or bodies vested with such control shall have, after investigation, determined that a need exists for such school building and that such school corporation cannot provide the necessary funds to pay the cost or its proportionate share of the cost of the school building or buildings required to meet the present needs; . . .” (My italics.)
The meaning of the italicized words above, contained in the statute, is that the law can apply only to such townships, towns and cities, whose total taxable property as disclosed by the last assessment is so low that they cannot raise funds sufficient to provide the buildings and grounds needed, within the constitutional limitations provided by Article 13 of the state constitution. This statement in the law itself, is notice given by the legislature that the sole purpose of the law is to evade the constitution of the state, by permitting the extremely poor political and municipal corporations to ignore it, and to engage in unrestricted spending. Apparently, other political and municipal corporations of the state are still left under the control of
No legal reason can be given why the poor townships and municipalities of the state should be penalized by the law in question, by removing them from the protection of
Section 2,
“Corporations, other than banking, shall not be created by special Act, but may be formed under general laws.”
In re Application of the Bank of Commerce for Change of Name (1899), 153 Ind. 460, 462 et seq.
It has been held that Special Acts are not unconstitutional under
It is provided by the state Constitution that:
“All county, township and town officers, shall reside within their respective counties, townships, and towns; and shall keep their respective offices
at such places therein, and perform such duties, as may be directed by law.”
Art. 6, §6 . (My italics.)
The building of school buildings in townships of this state has been a specific duty of township trustees and township advisory boards since 1899. Sections
Since the constitution noted provides for the creation of township officers and charges them with performing such duties as may be directed by law, the question is posed in the instant case: May the legislature authorize the creation of a private corporation and endow it with coordinate power to perform the acts of sovereignty, and the governmental duties allotted by the constitution and laws to the trustees and advisory boards of townships, in the matter of erecting school buildings?
It seems to be the general rule, to which there are no exceptions, that the duties which the laws require to be performed by county and township officers may not be contracted to be done by third persons without official standing, as a matter of public policy, and any such contract or authorization is ultra vires and void. State ex rel. Workman v. Goldthait (1909), 172 Ind. 210, 223, 87 N. E. 133. City of Richmond v. Dickinson (1900), 155 Ind. 345, 346, 58 N. E. 260. The City of Ft. Wayne v. Lehr (1882), 88 Ind. 62, 64.
“Briefly, the term ‘public office’ embraces the idea of tenure, duration, fees, emoluments, powers and duties. . . . All of them taken together constitute a public office.
“Public offices are created for the purpose of effecting the end for which government has been instituted, which is the common good, . . . In the
last analysis, a public office is a privilege in the gift of the state. It must have some permanency and continuity and possess a delegation of a portion of the sovereign power of government to be exercised for the benefit of the public.” 42 Am. Jur. Public Officer, Sec. 3 p. 881. 67 C. J. S. Officers §2-a p. 97.
Our court, quoting from decisions of the United States Supreme Court, has given similar definitions. Foltz v. Kerlin (1886), 105 Ind. 221, 223, 4 N. E. 439. Wells v. State ex rel. Peden (1911), 175 Ind. 380, 384, 94 N. E. 321.
I think it is clear that the legislature is without power to authorize the creation of a private corporation for the sole purpose of exercising the sovereign power of government coordinate with or supplemental to the duties of public officials of township, municipal, county or state government. So far as I can find this question has not been before our courts but it seems axiomatic, that one who exercises sovereignty must hold a public office and be under the usual oath, and if required, bond as such. See: Adams v. Tonella, 70 Miss. 701, 14 So. 17, 22 L. R. A. 346. If this can be done in this instance, there is no reason why all our local governments may not be taken over by similar private corporations, and thereby government by the people may perish.
In the argument before us counsel for appellees and amicus curiae stressed the great need of the appellee townships for better school buildings. That there is such need is undoubtedly true. No doubt the same argument of “need” was presented to the legislature. This argument poses a simple question. That question is, shall our state constitution be supported and sustained, or shall we have the school buildings? Certainly we cannot immediately have both. The legisla-
Section 3 of the Act provides:
(1) All lease contracts shall provide that the lessee shall have an option to renew the lease; or to purchase the leased property. If the option to purchase is exercised the purchase price shall equal the amount required for lessor to pay all indebtedness, including interest, par value of stock sold, and expenses.
(2) “No such contract of lease shall provide, nor be construed to provide, that any such school corporation shall be under any obligation to pur-
chase such leased school building or buildings, or under any obligation in respect to any creditors, shareholders or other security holders of the lessor corporation.”
In the Hively v. Nappanee case, cited with approval in the majority opinion, concerning a similar provision in the 1927 Act, Ch. 223, our court, noted that the school city must carry out its contract during the entire rental period or exercise its option to purchase in order to keep possession of the school property. It further noted that the school corporation was required to levy a tax annually to pay the amounts necessary to carry out the contract. Section 11 of Chapter 273, Acts 1947, p. 1095, as amended by Chapter 177, Acts 1949, p. 593, provides:
“Sec. 11. Any school corporation which shall execute a lease contract under the provisions of this act shall annually levy a tax sufficient to produce each year the necessary funds with which to pay the lease rental stipulated to be paid by such school corporation in such lease contract. . . . The first tax levy shall be made at the first annual tax levy period, following the date of the execution of the aforesaid lease contract and said first annual levy shall be sufficient to pay the estimated amount of the first annual lease rental payment to be made under said lease. Thereafter the annual levies herein provided for shall be made.”
It must be noted that the statute, just noted, is quite explicit in providing that the involved school corporations shall annually levy a tax sufficient to raise the funds to meet the so-called “rentals” payable to the lessor corporation, but in fact for the benefit of the bondholders. This makes the officers of the involved townships merely ministerial, or servants of the private corporation without a right to exercise discretion. In the Hively case our court, at page 35, said:
“. . . for all practical purposes, it is clear that the entire liability for the whole bond issue of the building company must and does rest on the school city, . . .”
With respect to a clause in the rental contract, and to the third grammatical paragraph of Sec. 2, Ch. 223, Acts 1927,1 almost exactly similar to the last sentence of Sec. 3, Chapter 273, Acts 1947 and which I have heretofore quoted in full under my own number (2), (of a similar provision contained in the lease contract in the instant case) we said in the Hively case:
“The contract actually accomplishes exactly what it disclaims in the paragraph just quoted. We, therefore, conclude that the contract set up in the complaint constituted a present indebtedness on behalf of the school city for the total amount to be paid out thereunder, and it follows that the complaint states a cause of action and is good as against a demurrer.”
In the instant case it seems to me that the statute upon which appellees have acted and the contract executed thereunder, are subject to the precise infirmity as the contract and statute considered in the Hively case and therein declared unconstitutional as being in conflict with
Section 9 as amended by the
It is quite apparent that the lessor corporation provided for by the law, is created for the sole purpose of raising the funds for the erection of the school buildings, and that, of course, is the duty alone of the trustees and advisory boards of the two townships under other existing laws, and is an exercise of sovereign power by the private corporation. There is no pretense that these legal officers of the townships are unauthorized by law to erect school buildings under existing law. The sole purpose of creating the lessor corporation then, is to elude officers, official action, official duty and responsibility, and to exercise sovereignty by the private corporation, the object being to evade Article 13 aforesaid. The sole purpose in having the securities sold by this lessor instead of the legal officers of the involved townships, and of having this so-called “lessor corporation” enter into a lease contract with the two townships involved is because there is believed to be some authority, that if the contract to pay is called a rental contract, it may not offend this constitutional prohibition. All this, to me is clearly a crafty subterfuge designed by cunning persons for the sole purpose of evading the constitutional prohibition.
The action before us is to set aside the lease-contract entered into April 9, 1951, and to enjoin defendants (appellees) from taking further action under the lease, for costs and all proper relief. So far no site has been secured, no building has been started, and nothing has been done to suggest a practical construction of the law attacked, and the action has been timely instituted. To apply the constitutional prohibition against contracting an excessive debt by a political corporation at this time cannot injure appellees or anyone else but must be beneficial to all.
In the Jefferson School Township case, supra, our court, apparently refused to permit itself to see the
“A careful examination of the allegations of the first paragraph of complaint forces the conclusion that the facts alleged fail to show that the Jefferson School Township, by becoming a party to the lease-contract involved in this suit, did incur a present indebtedness in excess of its constitutional debt capacity.”
The majority opinion fails to pass upon the question of the constitutionality of the law upon which the proceeding involved is founded in the instant case. As in the Jefferson School Township case, it confines itself solely to a consideration only of the validity of the so-called lease. It is the position of appellees that the constitutionality of the law upon which they have proceeded is not involved in this case. The majority opinion sustains the position of appellees. Thus we are left without a judicial determination of the constitutionality of
I think the judgment of the trial court should be reversed.
NOTE.—Reported in 109 N. E. 2d 889.